Download Needed Steps to Advance Infrastructure Finance

World Economic Forum
What is Needed to Advance Infrastructure
Needed Steps to Advance Infrastructure Finance in Latin
American and the Caribbean (LAC)
Diagnosis and Challenges of Economic Infrastructure in Lac
Pietro Masci
Inter-American Development Bank
New York, June 22, 2005
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Contents
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Infrastructure and Growth
Private Sector and Growth
Reforms and public discontent
Recurrent dissatisfaction, diminished expectations
LAC falls behind
Investment needs
Can reforms be made sustainable?
Challenges for governments and IFIs
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Infrastructure and Economic
Growth
• Good infrastructure promotes economic
growth (as opposed to White Elephants)
• Private sector is the engine of growth
3
What Happened?
Public retrenchment never fully offset by private entry
5%
TOTAL
Public
Private
4%
share of GDP
4%
3%
3%
2%
2%
1%
1%
0%
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
4
Source: Calderon and Serven (2004)
Infrastructure Investment in LAC 9
3.5%
(As percentage of GDP)
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1981
1983
1985
1987
1989
1991
Public
1993
1995
Private
1997
1999
2001
5
The State of the Opinion
•Infrastructure reforms and privatizations do not go well with the
Latin American opinion.
•According to Latinobarometro, a high and growing % of L.A.
people disagree that privatization was beneficial for their country:
As of 2003, in the 17 countries surveyed, negative views of
privatizations ranged from 53% in Honduras to 83% in Argentina,
for Latin American average above 67%
6
The State of the Opinion: A Privatization Paradox?
• Strong public discontent contrasts with rather favourable
evaluations of the privatization process in terms of operating
efficiency / profitability / output / investment / service coverage /
fiscal results / some social indicators (e.g., child mortality) /
poverty / income distribution.
• Discontent occurs even in countries where unequivocal welfare
gains (more access, lower prices, improved quality) have
materialized
• This parallels a generic discontent with reforms / free markets /
democracy, etc.
(La Porta & Lopéz-de-Silanes 99, Megginson & Netter 2001, McKenzie & Mookherjee 2003, Chong & Lopéz-de-Silanes 2004, Galiani et
al. 2005).
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Percentage of respondents who (strongly) disagree that privatization has
been beneficial for their country
Argentina
Panama
Bolivia
El Salvador
Peru
Uruguay
Paraguay
Ecuador
2003
Nicaragua
1998
L.A.
Guatemala
Mexico
Venezuela
Colombia
Chile
Brazil
Honduras
0
20
40
60
80
100
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Why is this Happening?
• What are some of the causes del rechazo social?
Various studies point to different factors:
– Unequal income distribution, Graham (2005)
– Perception that benefits accrue always to the same people, Boix
(2005)
– Perception of Corruption, Martimort y Straub (2005)
– Political and economic shocks, property rights, beliefs, Di Tella
(2005)
– Lack of deepening of reforms, Kucinsky and Williamson (2003)
– Privatization, deregulation and capital market development
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Recurrent dissatisfaction, diminished
expectations
• Distrust in governments makes privatization look
as “the same recipe once again” if things go wrong
• Distrust leads to expect that current gains will be
expropriated or will reinforce the status quo
• Recalcitrant expectations form when property
rights can only be defended by those who have the
means and skills
• Advance in economic progress, property rights
enforcement and inequality reduction needed to
develop trust
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LAC is falling behind
Various measures of gaps between LAC and
other areas (e.g., Asia)
Caveat: geography and GDP composition
(Singapore figures cannot be compared with
Brazil’s)
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LAC has fallen behind China and Middle Income
Countries
2500
LAC
2000
MIC
China
1500
1000
500
0
Access to
electricity (%)
Source: World Development Indicators
Roads (km/km2)
Mainline per 1000
pers
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Latin American firms see infrastructure as a
bottleneck
Businesses that see infrastructure as a serious problem for the
growth of their business:
LAC
Middle East & North Africa
Sub-Saharan Africa
South Asia
Europe & Central Asia
East Asia & Pacific
0
10
20
30
40
50
60
Percent of firms
Source: World Bank Investment Climate Surveys
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Investments Needs
• Various estimations of investment needs for
infrastructure in the years ahead
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How much is needed depends on the goal
• Universal coverage of water and sanitation?
• ~ 0.25% over 10 years
• To maintain and rehabilitate existing assets?
• ~1% of GDP for adequate maintenance
• Impossible to estimate rehabilitation needs
• For business as usual?
• ~ 2% of GDP to satisfy consumer and firm demand based on
modest growth assumptions
• To grow and take off?
• ~4 to 6% of GDP to catch up with Korea and keep up with China
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Brasil: Expected Investments by Sector
Investimentos Totais (2000-2007)
US$ 164,9 bilhões
Meio Ambiente
Informação & Conhecimento
US$ 12,4 bilhões
Transportes
US$ 29,3 bilhões
US$ 1,6 bilhão
Energia
US$ 28,5 bilhões
Desenvolvimento Social
US$ 52,5 bilhões
Telecomunicações
US$ 40,6 bilhões
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Where is the Funding Coming from?
• Foreign Borrowing
• Domestic Markets
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Investments
• A growing attention to Project Finance occurs when international financial
markets become unavailable. Role of Domestic markets and Public sector
banks/Funds
• Legal and regulatory environment are not enough to mitigate risks
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Example of Project Finance
Sponsors and Investors
Government
Regulation
Constructors
Financial Institutions
Trustee
$$$
Special
Purpose
Company
Suppliers
Operators
Cash Flow / Services
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Example of PPP
Government
Regulation
Sponsors and Investors
Constructors
Loans
DB, BID,
and other
SPE
Suppliers
Operators
Fiduciary
Agent
Cash Flow
Liquidity Fund
Treasury/
Fiscal Fund
Achievement of
Contractual Goals
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Domestic Capital Market Development
Trade off:
 Capital market – Public sector financing
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Latin America: BOND MARKET (By type of issuer)
250
150
Financial
Government
100
Corporate
50
0
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
US Billions
200
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BRAZIL: Bond Market (By type of issuer)
(1993-2004)
50.0
45.0
40.0
US Billions
35.0
30.0
25.0
20.0
Financial
Corporate
Government
15.0
10.0
5.0
0.0
-5.01992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
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Mexico: Bond Market (By type of issuer)
(1993-2004)
45.0
40.0
US Billions
35.0
30.0
25.0
Financial
Corporate
20.0
Government
15.0
10.0
5.0
0.0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
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CHILE: Bond Market (By type of issuer)
(1993-2004)
8.0
7.0
6.0
US Billions
5.0
4.0
Financial
Corporate
3.0
Government
2.0
1.0
0.0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
-1.0
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Putting all
together……
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LATIN AMERICA: Bond Market, Stock Market Capitalization
and Credit to Private Sector 1991-2004
700.0
600.0
Bond Market
400.0
Stock Market
300.0
Credit to Private Sector
200.0
100.0
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
0.0
1991
US Billions
500.0
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Reasons to Develop Capital Markets
• To satisfy -supposedly efficiently- the financial
need of Government
• To allocate resources efficiently
The key to success is to find and maintain the
right mix between these two functions that may
create opportunistic actions, and conflict of
interests
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Development of Capital Markets
As the economy grows -particularly in
relatively large countries- and the
possibilities of external financing are
limited, corporations need long term
financing possibly through capital markets.
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Alternative to Capital Market Development
• Creation of Development Banks (DBs) to provide long
term financing not otherwise available
• Historically, this is the experience in Europe and also in
LAC countries
• However, economic efficiency was not the objective of
these institutions (e.g., political theory of development
banks) and mismanagement and corruption were the rule
rather than the exception and financing the economy took a
back seat
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Competing or Complementary Courses
of Actions?
State Model
•
Long term financing
provided by DB and
external sources
Market Model
•Long term financing
provided by capital
markets
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Other additions to the toolkit
• Infrastructure funds and unbundling of
building and financing in project finance
• Mezzanine structures and equity kickers
• Better use of guarantees
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Other additions to the toolkit
• Financial structures adapted to local context
• Governance measures to level the playing
field between contractors and governments
• Governance measure to proactively manage
risk and avoid project collapse
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Financial structures for economically sound
transportation projects
Case 1: HIGH fiscal space
credibility
(+)
Private
profitability
(-)
- PPPA: profit-sharing
- PPPD: concession with
public guarantees
- Pure concessions
- Civil works
- Single-payment
outsourcing contracts
Low
- PPPE: classic PPP
with recurrent public
payments
High
Contract enforcement by courts
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Financial structures for economically sound
transportation projects
Case 2: LOW fiscal space
credibility
(+)
Private
profitability
(-)
- PPPA: profit-sharing
- PPPA: profit-sharing
- Single-payment
outsourcing contracts
- PPPB: public/community
procurement (matching);
evaluate tax earmarking
Low
- PPPC: concession
revenue supplemented
by land use rights
High
Contract enforcement by courts
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Can reforms become sustainable?
• A long-term, evolutionary, incremental approach
to reach infrastructure reform sustainability
• Effort inside the sector to increase reform quality
and public support must not diminish
• However, a purely sector approach does not
suffice, given distrust in government and the
pervasiveness of inefficient redistribution
• Coordinate sector measures with advances in (i)
redistributive and fiscal policy; (ii) rule of law;
(iii) capital market development
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Can reforms be made sustainable?
Redistributive policy
and fiscal space
Growth
Sector Reform and
Investments
Rule of Law
Capital Market
Development
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Where are We?
• The need of infrastructure financing is clear
• The commitment of Government bond development is
strong
• However, will the government find and keep the right mix
between the public sector and private sector financing? Or
it might be tempted to give preference to the first one?
• In LAC we see that in large part Governments are
committed to fiscal discipline and are attempting to move
towards the optimal mix. However, this is valid for large
countries (e.g., Mexico, Brazil).
• Small countries? Will we have a two speed LAC? This is a
big challenge
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Looking Forward
• Reforms take time and perseverance even if you
have “big bangs”
• Government: Enabling environment + Leadership
+ Continuity + Doing the right things and attack
the roots
– Institutional, Political, Administrative and Judicial
stability
– Stop the pendulum between public and private sector in
financial markets
• Growth and competitiveness are complementary
and instrumental to reach better standards of living
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Challenges for Governments and IFIs
• How to combine political leadership and
empowerment to start change in expectations
• How to ensure permanence of results to
consolidate expectations
• Tactical advice for sector reform meanwhile: press
for measures that self-reinforce in the right
direction; avoid overwhelming institutions with
duties beyond their capabilities
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IDB in Latin American and Caribbean Markets
Five Pillars of the IDB’s approach to infrastructure
and capital market development
1.
2.
3.
4.
5.
Institutional support through capital market development
initiatives and infrastructure financing
Government Debt management and bond issues as a building
block of capital market development
Contributing to the development of local currency financing as
issuer (e.g., Finance Department) and as lender for domestic
capital markets development (e.g., PRI);
Local currency financing to the public sector;
Efficiency of State owned banks
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Key Messages
• LAC needs to spend more on infrastructure
• LAC needs to spend better
• Governments remain at the heart of the
infrastructure challenge
• The private sector can contribute, but only if the
region builds on the lessons of the last decade
• Investments in infrastructure have to be regarded
in an holistic fashion
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